A key rule change for Delaware incorporation agents goes into effect Jan. 1 - Technical.ly Delaware

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A key rule change for Delaware incorporation agents goes into effect Jan. 1

The new rules are known as "Know Your Customer."

Legislative Hall in Dover.

(Photo by Flickr user Jeffrey, used under a Creative Commons license)

With the lightning-fast convenience of the internet age, it’s easier than ever for businesses all over the world to incorporate themselves in Delaware, often with misinformed ideas that the state is a tax haven or that it’s less transparent.

But forming a Delaware LLC illegally is about to get even harder.

Earlier this month, state legislators passed House Bill 404, which clarifies that registered incorporation agents in Delaware are legally obligated to comply with existing regulations, ensuring that no individual business owner trying to incorporate a company here has previously been prohibited from doing business in the United States.

Or, as John Williams of IncNow, a Wilmington legaltech firm that helps businesses incorporate in Delaware, puts it: “To make sure that formation agents are checking the Treasury [Department’s] ‘naughty’ list.”

The new legislation won’t disrupt William’s business, or any Delaware incorporation firm thay currently does their due diligence.

“IncNow and some other larger agents have been running these OFAC checks for some time as part of our risk management policy,” he said. “These new regulations helped address the concern of smaller registered agents who represent about 20 percent of all Delaware companies. Some of those smaller agents may not be technically sophisticated enough to run these checks regularly.”

Delaware’s unique reputation in the business world makes the extra vetting necessary. “Critics wrongly assume Delaware is a tax haven or a privacy haven,” said Williams. “It seems every negative news story about Delaware entities identifies the bad guy, so that shows the privacy afforded by Delaware is limited at best.”

The real benefit to large and small companies, who apply for Delaware incorporation in droves, is Delaware’s Court of Chancery. “Entrepreneurs incorporate in Delaware because it allows them to export the great legal system in Delaware to apply in places where laws may not be as business friendly,” Williams said.

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The new law will go info effect on January 1.

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